Judge Widens Antitrust Suit Against Private Equity Firms

A federal judge has greatly expanded the scope of an antitrust lawsuit against the world’s largest private equity firms, broadening the case to include some of the largest leveraged buyouts in history.

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The litigation is a flashback to the heady period from 2005 to 2007 when some of the country’s most well-known companies fell into private hands. Flush banks lent private equity firms billions of dollars to finance these deals. As the acquisitions grew ever larger, the biggest firms pooled their money and began buying companies together.

At issue in the suit is whether the “club deals” in vogue last decade were an illegal attempt by private equity firms to collude and drive down the prices of the acquisitions they made jointly. The case was brought by former shareholders of the acquired companies, including a Detroit pension fund and a pair of doctors.

Late Wednesday, Judge Edward F. Harrington of Federal District Court in Massachusetts ruled that the plaintiffs could seek information about 10 additional deals, including the largest buyout ever: the $44 billion takeover of TXU by Goldman Sachs, K.K.R. and two other firms. Other transactions now subject to investigation by the plaintiffs include the acquisitions of Harrah’s Entertainment, Univision, Clear Channel and Toys “R” Us.

Until now, the case was limited to 17 leveraged buyouts like SunGard Data Systems, purchased by seven private equity firms, and Freescale Semiconductor, which four different funds acquired.

With the additional transactions added to the lawsuit, the private equity firms will now be forced to turn over more internal documents and e-mails. Already, they have produced millions of pages of documents to the plaintiffs.

Lawyers defending the private equity firms have said that the case has no merit. In a court filing, the defendants called the lawsuit “a far-fetched theory by doing nothing more than describing routine M.&A. activity, and labeling it anticompetitive.” Indeed, there were bidding wars for many of the largest deals that actually drove up their purchase prices, they say.

The case, no matter how it turns out, has become an expensive and distracting one. The firms have collectively racked up more than $100 million in legal fees defending the suit, people briefed on the litigation said. They spoke on condition of anonymity because they were not authorized to speak publicly about the case.

The plaintiffs have deposed more than 30 of the country’s most prominent private equity executives, including Glenn Hutchins, one of the two chief executives of Silver Lake, and Stephen Pagliuca, a senior executive at Bain Capital Partners.

To be deposed later this year are Stephen A. Schwarzman, the head of Blackstone Group; David Rubenstein, a co-founder of the Carlyle Group; and Leon Black, the chief executive of Apollo Global Management.

Much of the case has been cloaked in secrecy. The judge issued a broad protective order early in the case that has kept all of the evidence from public view. A recently filed amended complaint that is said to include embarrassing e-mail correspondence between private equity executives has been under seal.

The case harks back to the boom, a period that the plaintiffs call the “conspiratorial era.” In the suit, they portray a corrupt deal culture in which firms submitted sham bids and secretly allocated deals among themselves. The complaint cites a 2006 speech made by David Bonderman, a co-founder of TPG, in which he reportedly said, “There’s less competition for the biggest deals.”

As an example of possible collusion, the plaintiffs pointed to the $21.3 billion acquisition of the giant hospital operator HCA, which was led by Bain and K.K.R. No competing bid materialized, the lawsuit said, because of an understanding that if “you don’t bid on my deal, I won’t bid on yours.”

The complaint also noted an academic study by three business school professors concluding that the premiums paid to shareholders for club deals were lower than those in takeovers involving one firm.

“The result is that private equity firms collectively capture multibillion-dollar corporations and take them private at artificially low prices,” the lawsuit said.

The complaint was filed in 2007 after the Justice Department began investigating potential collusive behavior related to club deals. No actions were ever brought by the government.

Many of the largest deals of last decade’s buyout boom have fared better than expected. During the depths of the financial crisis, Wall Street analysts predicted a wave of bankruptcy filings for companies as they struggled with a global recession and heavy debt load. But a recovery in the capital markets allowed many of these companies to shore up their balance sheets through debt refinancing and equity offerings. HCA, for example, has generated billions of dollars in profit for its owners.

Still, several of the biggest buyouts continue to suffer. Energy Future Holdings, the large Texas utility formerly named TXU, has been buffeted by persistently low natural gas prices. Clear Channel, the radio and outdoor advertising giant, has wrestled with a soft advertising market, although its performance has improved.

The type of club deals highlighted in the antitrust lawsuit are, for now, a thing of the past. As banks have tightened the reins on corporate loans, the size of deals has shrunk. Private equity firms have not teamed up on any of the 10 largest buyouts this year.